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Application of the Mundell-Fleming on Small Open Economy

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  • Neven Vidakovic

    (Privredna banka Zagreb)

Abstract

The object of this paper is to investigate the applicability of a Mundell-Fleming model. The model was developed in 1960s with the main intention of opening the standard closed economy Keynesian IS-LM model and adjusting the variables for the capital flows and other shocks that might result from capital flow. The paper develops the models into detail, contrasts the closed economy and open economy IS-LM model. The paper also extents the model for the application to the standard rational expectations theory. After developing the model, I apply the model to a small open economy. In this case, I chose Croatia. Small open economy in the middle of Europe. The country was chosen because it is currently undergoing the transition from socialistic planed economy to open capitalistic economy and it is very susceptible to the capital flows. The model fits the data very good and proves on the data that monetary and fiscal policy if used separately will have no effect on the economy because of the capital flows.

Suggested Citation

  • Neven Vidakovic, 2005. "Application of the Mundell-Fleming on Small Open Economy," Ekonomija Economics, Rifin d.o.o., vol. 11(3), pages 392-423.
    • Handle: RePEc:eff:ekoeco:v:11:y:2005:i:3:p:392-423
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